Consumption Externalities, Backhauling, and Pollution Havens

Abstract: Pollution havens have received a great deal of attention in the past 15 years. However, the literature has focused almost exclusively on production side externalities and whether dirty industry migrates to countries with lax environmental laws. More recently, concerns have been raised about the rapid explosion of consumption side pollution such as e-waste and its trade in international markets. Between 1996 and 2005, US exports of waste plastics and waste steel along the USA-Asia trade route increased by 2,433 % and 513%, respectively. Over the same time period the average freight rate on commercial liners along the USA-Asia trade route fell by 43%, while average freight rates along the Asia-USA trade route increased by more than 14%. This paper develops a two country trade model with endogenous asymmetric transport costs as well as externalities associated with harmful waste generated from consumption. It is shown that even when both governments set optimal Pigouvian taxes on the consumption of the dirty good, endogenous asymmetric transport costs can lower the ‘backhaul ’ rate from North to South. This creates an environmental arbitrage condition by which it is cheaper for the North country to export it’s waste to the South rather than dispose of it at home. The model yields a number of clear predictions regarding the relationship between country characteristics, the international terms of trade, the backhaul shipping rate, and the North’s export supply function of waste